Cookie Use

Drewberry™ uses cookies to offer you the best experience online. By continuing to use our website you agree to the use of cookies. If you would like to know more about cookies and how to manage them please view our privacycookie policy.

How is Keyman Insurance Taxed?

Get My Instant Quotes
Compare Top UK Insurer Quotes Logos

Keyman Insurance protects your business against the loss of a key member of staff should they die or suffer a critical illness. It will pay out a cash lump sum into the business so the company can cope with any turbulence during such a loss. It can help with:

The below is a general guide to HMRC’s taxation of Key Person Cover, although if there’s any doubt you should always check with your accountant and / or your local tax office.

HMRC, Keyman Insurance and Tax

How Key Man Insurance is taxed is a complicated business governed by a set of guidelines laid out more than 70 years ago known as the Anderson Rules.

One of these guidelines is the ‘wholly and exclusively test‘, which is one of the major factors in deciding whether or not you pay tax on Keyman Insurance premiums.

The wholly and exclusively test looks at whether the payout from the policy will be ‘wholly and exclusively for the purposes of the company’s trade’, i.e. solely for the benefit of the business. If so, premiums are typically a tax-deductible business expense against the company’s corporation tax bill.

Taxation of Keyman Insurance Protecting a Shareholder

Where a policy would benefit the company shareholder the purpose of the policy fails the ‘wholly and exclusively’ test and premiums are therefore unlikely to be eligible for corporation tax relief.

According to HMRC’s Business Income Manual at BIM45530:

“Where the key person is a director whose death would significantly affect the value of shares in the company, one of the purposes for taking out the policy may be a non-trade purpose of protecting the value of the director’s shares and therefore the value of their estate … [and are] not paid wholly and exclusively for the purposes of the company’s trade.”

There may be some ‘wiggle room’ for minority shareholders who own around 5% or less of the company. This limit isn’t statutory – it’s more of a guideline and may be open to negotiation with HMRC on a case-by-case basis.

Payouts on plans that cover company shareholders usually count as a trading receipt, which means that they’ll also be taxed. So it’s worth remembering that policies that benefit shareholders could be taxed on the way in and on the way out.

Taxation of Key Man Insurance Covering an Employee

When Keyman Insurance is taken out to cover an employee, premiums are typically a tax-deductible business expense eligible for corporation tax relief. This is because the payout is not for the benefit of the employee but for the business to make up for the loss of that key person.

The benefit usually counts as a trading receipt and will therefore be taxable. Where benefits are taxable, you’ll need to gross up the payout to ensure that the net figure you receive post-tax will still meet your needs.

Key Person Insurance Tax When Protecting a Business Loan

When you take out a Key Person Insurance policy specifically to protect a business loan, premiums again fail the ‘wholly and exclusively’ test because the payout isn’t for the business – it’s for the benefit of the lender. This means that you’ll need to pay tax on the premiums covering business loans.

However, given the payout is intended to rebalance the company’s capital account it’s not classed as a trading receipt and so is usually paid tax-free. This means that there’s no need to gross up the value of such policies, which naturally reduces the premium.

Sam Barr-Worsfold Business Protection Expert at Drewberry

As a general rule of thumb, where you get tax relief on Keyman Insurance premiums, the benefit will be taxable to compensate and vice versa. 

However, this isn’t always the case, such as where the policy covers a shareholder, so it’s always best to check the ins and outs with your accountant and HMRC.

Sam Barr-Worsfold
Business Protection Expert at Drewberry

This firm is the best in the market!! The staff are experienced and they know exactly how to help with such major decisions. Thank you especially to Rauri: a 5 star service throughout. I will recommend and use Drewberry again.

Alberta Opoku
06/10/2019
Compare Top 10 UK Business Insurers
Takes approx. 60 seconds
  • £

Or call us on 0208 432 7333

Compare Top UK Insurer Quotes Logos
Contact Us
Head Office & Pensions and Investments
Millennium Bridge House
2 Lambeth Hill
London
EC4V 4GG
Personal Insurance & Accounts Payable
Telecom House
125-135 Preston Road
Brighton
BN1 6AF
Drewberry London Office MapDrewberry Brighton Office Map
Our Core Principles
  • 1You Come FirstWe are a client focused business who always aim to put you first.
  • 2We are ExpertsTo provide you with the best advice, we need to know our stuff!
  • 3We are HumanWe are real people with feelings who are here to help you.
  • 4We are ProfessionalProviding a 5-star service requires a professional approach to everything we do.
  • 5We are here to EducateWe don't believe in sales, we are here to educate so you can make informed decisions.